Category: ethereum

WARNING: Using cryptocurrencies means accepting the risk that your funds can be irrevocably lost or stolen. Use best practices when managing your private keys! There is no substitute for knowledge and proper precautions.

This guide will walk you through converting ether into DAI stabletokens using a decentralized exchange. This guide assumes you have metamask installed as a browser extension and that you have ether in your metamask wallet that you’d like to convert (minus an additional gas fee) into the DAI stabletoken. You can add funds to your wallet using an exchange such as coinbase. Completing this tutorial on Ethereum mainnet will require converting at least $30 plus a fee into 30 DAI stabletokens.

What is DAI?

DAI is an ethereum stabletoken. Unlike other stabletokens (e.g. Tether, USDC), DAI does not use fiat as collateral. Instead DAI uses a dynamically allocated pool of ether to maintain the value of DAI.

DAI is a “soft” peg to the US dollar. As of this writing the maximum and minimum values of DAI were $1.06 and $0.97 respectively. The token usually trades within a cent or two of $1. DAI has maintained its peg of $1 USD since it’s inception on December 18th 2017. This gives the DAI stabletoken the distinction that it has weathered the erosion of value of ethereum and other cryptocurrencies relative to the US dollar experienced since their peak in January 2018.

Stablecoins are useful because they enable the exchange of goods and services using a cryptocurrency while keeping the price denominated in a global reserve currency (in this case the US dollar). Stabletokens are also useful as a hedge against the excessive volatility of cryptocurrencies, effectively allowing users to increase their ethereum holdings if they can correctly anticipate a reduction in the eth -> usd exchange rate. Stablecoins could potentially serve as means to stabilize local economies that suffer from corruption or high inflation (e.g. Venezuela, Zimbabwe. See step 3).

How does it work?

While most users will only use DAI as a medium of exchange, there is a complex credit market operating in the background. This is what actually maintains the stabletoken peg. Note that it isn’t necessary to understand this part of DAI to use it as if it were USD. Regular users will not create DAI, they’ll simply exchange their ether for it at a decentralized exchange.

The DAI peg is maintained using a game where borrowers act selfishly, and in doing so maintain the peg. In this economic game, the supply of DAI is regulated in response to demand for the stabletoken. If the peg slides too far in either direction of $1, borrowers can get “free money” from an exchange, which in turns causes the price to go in the other direction. If the demand for DAI stabletoken goes up, borrowers are incentivized to create more DAI. If the falling demand for DAI pushes down the peg, borrowers are incentivized to reduce its supply. Meanwhile, bots known as “keepers” ensure there is sufficient collateral in the system. Keepers are free to liquidate insolvent loans once they fall below a global threshold (150% collateral). Borrowers can prevent being declared insolvent by ensuring that there is sufficient collateral backing their loan.

The stabletoken protocol is implemented using a two types of erc20 tokens: MKR and DAI. DAI is the actual stable token, MKR is a governance token that is used to create loans and allow users to participate in the governance process.

The lender(s) of last resort:

Every store of value includes some level of risk. DAI is not FDIC insured. Instead it uses market mechanisms to ensure that DAI is safe to hold. In this system, the lender of last resort is not a single entity (the Fed), instead it is the total pool of DAI collateral.

Excluding systemic risk to the DAI stabletoken system itself, the risk in the DAI stabletoken system is assumed by MKR holders, i.e. users who create DAI by taking out a loan on their ethereum holdings and receiving DAI in return. These users take responsibility and are potentially rewarded for the task of regulating the amount of DAI stabletoken in existence.

Users who merely exchange DAI for goods and services can safely assume that their tokens have stable value in the short to medium term. The DAI peg could fail in a “black-swan” event or a financial attack where the markets for MKR or Ether collapse to a very small value. Presumably the decentralized nature of these markets makes them resistant to these types of collapses, however these markets are still quite young, so proceed with due diligence and care!

Step 2: Use oasis.direct to convert ethereum in your wallet to DAI stabletoken
Oasis direct is an open-source, decentralized eth to dai exchange. There are no fees other than the gas fees required to execute the smart-contract. NOTE: This step will be updated soon